Plan now for 2012 reporting Forms 1099B and W2
ECLUB NEWS |
An article titled New Form 1099-B Reporting Requirements appeared in the December 2011 issue of eClub News. That article highlighted additional reporting responsibilities private clubs will have as the result of the Emergency Economic Stabilization Act of 2008. Brokers (a term which can include clubs) must report basis in securities sold in addition to gross proceeds. Since that article was distributed, many clubs have contacted the McGladrey team to inquire about how basis is calculated and what clubs must do to keep track of members' basis. In addition, as Forms W-2 for 2011 were being prepared, many club controllers realized certain types of compensation that had not been anticipated (e.g. car allowances) needed to be included in employees' Forms W-2. This article is intended to offer the clarification many clubs are seeking on these important issues.
In addition to reporting gross proceeds, if an equity certificate meets the definition of a "covered security," clubs must report the selling member's basis in that certificate as well as whether the gain or loss on redemption is short- or long-term. For a private club, the term covered security means a certificate purchased by a member on or after Jan. 1, 2011.
Think of a club as a corporation no different from any other corporation that is doing business and think of an equity certificate as a share of stock. Amounts that a shareholder (member) puts into the corporation to purchase the stock and subsequent amounts that are capital contributions increase the shareholder's basis in the stock. For a club, the initiation or joining fee is often paid for the purchase of the equity certificate and would provide basis as long as the funds are used and accounted for by the club as capital. Yearly capital assessments that qualify as contributions to capital (set aside for specific capital projects, placed in separate bank account for capital purposes, etc.) would also typically provide basis.
In determining whether or not any amount, including initiation fees, is a contribution to capital, consider whether the payment is being made to obtain goods or services. If it is, it is not a capital contribution and, therefore, would not increase basis. Regular monthly assessments, for example, based on a club's operating budget are normally amounts paid for goods and services and do not provide basis.
Another point of confusion has been around refundable memberships. Some clubs are under the impression that, if an equity certificate is not refundable, no reporting will be necessary. However, in addition to clubs that redeem equity certificates, clubs that facilitate or assist in the sale of these interests between members are considered brokers and subject to this reporting on Form 1099B.
Over the last couple of months, many questions arose concerning amounts paid to employees that are not typical payroll items. Certain employees receive car allowances, debt forgiveness and nonqualified deferred compensation. These items are not usually on the radar for payroll reporting during the normal course of business but come to light as W-2's are being prepared. Clubs often end up issuing the employee a Form 1099 for these unusual amounts. However, such reporting is inappropriate and in fact is being specifically looked at during the course of IRS payroll tax audits.
For car allowances, consider moving to an accountable plan. Rather than provide an employee a straight amount per month (e.g. $500 per month car allowance), require the employee to account for mileage used for work purposes and then reimburse the employee for the exact amount. Benefits are two-fold: the amount does not need to be reported on the employee's Form W-2, making accounting and reporting simpler for the club; and, in addition, the employee does not have to report the reimbursement as income and is, therefore, not taxed on that income.
Items such as debt forgiveness and certain nonqualified deferred compensation must be included in the employee's Form W-2. If the club, as the employer, covers any of an employee's tax burden (federal income tax withholding, employee's share of FICA or Medicare), these covered amounts are also income to the employee and the wages reported must be increased to include them.